What Is an Oil ETF?

What Is an Oil ETF?

Let me explain what an oil ETF is. It's an exchange-traded fund that invests in companies in the oil and gas industry. These companies cover discovery, production, distribution, and retail, and sometimes the ETF includes the commodity itself. Some oil ETFs function as commodity pools, offering limited partnership interests rather than shares, and they invest in derivative contracts like futures and options.

Key Takeaways

You need to remember that an oil ETF invests in oil and gas companies. Some are commodity pools with partnership interests that use futures and options. When you invest in an oil ETF, you're not dealing with futures directly, so physical inventory isn't an issue for you.

Understanding an Oil ETF

If you're looking to get into oil markets and potentially profit without managing individual energy stocks, an oil ETF gives you advantages. It tracks an index, commodity, bonds, or asset basket, much like a mutual fund. But unlike mutual funds, it trades like a stock on an exchange, with price changes throughout the day, offering higher liquidity. You'll often find lower fees than mutual funds, which makes it appealing for individual investors like you.

Most investors, especially individuals, can't or don't want to handle physical crude oil storage. Yet the oil sector is popular for investing and trading due to its volatility. With an oil ETF, you avoid futures trading, so no physical inventory concerns. This is a straightforward way for you to enter the oil market.

The benchmark for an oil ETF could be an index of oil companies or the crude oil spot price. Funds might focus on U.S. companies or go global. There are even inverse ETFs that move opposite to the underlying index. Oil ETFs aim to track their index closely, but you'll see small discrepancies, especially short-term.

Investing Challenges of Oil ETFs

Oil ETFs attract high demand because oil is central to the global economy, and this trend will likely grow. Nearly every product used by people, businesses, and governments is impacted by oil prices, whether as a raw material or through energy, transport, and distribution costs.

That said, investing in oil ETFs can be tricky and complex. Many factors fluctuate and affect the market, making predictions hard. The market adjusts constantly, and global politics or environmental events can cause significant, unexpected impacts.

You'll find many oil-based ETFs to choose from. I recommend researching and comparing expenses and performance before investing. Some key ones in the U.S. include the United States Oil Fund (USO), which tracks daily changes in light, sweet crude oil spot prices at Cushing, Oklahoma, following the Benchmark Oil Futures Index; Vanguard Energy ETF (VDE), which indexes the MSCI US Investable Market Energy 25/50 Index with U.S. companies of various sizes; Alerian MLP ETF (AMLP), investing at least 90% in the Alerian MLP Infrastructure Index for energy commodity transport, processing, and storage; and Energy Select Sector SPDR ETF (XLE), replicating the Energy Select Sector Index with at least 95% in oil, gas, fuels, and energy equipment companies.

What Are the Biggest Oil ETFs?

The largest is the United States Oil Fund LP (USO) with $1.6 billion in assets under management, per ETF Database. Next is ProShares Ultra Bloomberg Crude Oil ETF (UCO) with $675 million.

What Are the Top Performing ETFs?

In 2023, the Brent Oil Fund LP (BNO) was the top performer. However, the United States Oil Fund (USO) offered the lowest fees and highest liquidity.

How Do I Invest in Oil ETFs?

The simplest way is through a brokerage like Fidelity or TD Ameritrade. Search for the ETF's ticker symbol or use their screener for 'oil ETFs'.

The Bottom Line

Oil ETFs are exchange-traded investments holding a basket of oil-related instruments, like company securities or petroleum commodities. You can trade them easily like stocks, but they provide more diversification than single securities.